Customization: Making Real Money in a Virtual WorldCustomization: Making Real Money in a Virtual World Financial institutions enthusiastically rushed to build online retail franchises

Opportunities for Action in Financial Services

Customization: Making RealMoney in a Virtual World

customization 3/01 3/23/01 10:19 AM Page 1

Customization: Making Real Money in a Virtual World

Financial institutions enthusiastically rushed to buildonline retail franchises. Now they are finding thatmaking money on the Internet is far from easy. Firmsthat invested substantially to develop the online chan-nel have grave doubts about their chances of everearning decent returns. Their disappointment doesnot mean that they should rein in their ambitions,however. Rather, it argues for a more methodicalapproach that will generate revenues by exploitingthe Internet’s unique richness and connectivity.

By carefully coordinating their online offerings withother channels, financial institutions can providehighly customized services to preferred customers. Foryears, financial leaders dreamed about delivering suchofferings to valued clients, but individualized solutionsalmost always seemed distant ideals rather than attain-able goals. Today the online channel is changing all that. It provides financial institutions with an im-proved ability to collect and analyze information onindividual customers and, more important, to use thisenhanced intelligence to create a tailored offering atrelatively low incremental cost. Furthermore, manyinstitutions are now approaching the critical mass ofonline customers that justifies such investments.

Already, a handful of focused competitors in thecredit card industry—including American Express,Capital One, and Providian—are developing promis-ing customized online offerings and integrating themclosely with other delivery channels. Establishedexperts at remote marketing and customer manage-ment, these companies swiftly incorporate and utilizeclient information to hone tailored offerings to select


individuals. A few banks and financial firms—includ-ing Charles Schwab, Citigroup, and Wells Fargo—aredeveloping similar approaches. Financial institutionsthat ignore such fast-moving competitors may soonfind themselves scrambling to shore up their con-sumer businesses.

Certainly, many in the industry plan to invest in cus-tomization. Studies in the United States, for example,suggest that in the next five years the financial indus-try will focus on analytical approaches to managingcustomer relationships, with some estimates suggest-ing that spending will grow between 13 and 17 per-cent per year. Much of it will be devoted to develop-ing better solutions for online customization. Clearly,these institutions believe the time is right to use on-line capabilities to manage customer relationshipsand finally make real money in a virtual world.

Falling Short

Managing customer relationships successfully, ofcourse, involves locating, acquiring, and retainingprofitable customers. It also entails reinforcing thepower of the brand with a synchronized approachacross all of an institution’s contact channels: the staffin branch offices, as well as the company’s Web site,call centers, and marketing campaigns. But that hasproved hard to do. Our research has revealed fivemain reasons for this widespread failure:

A Lack of Vision and Direction. The approach thatfinancial institutions take to managing customer rela-tionships online often has no overarching vision andstrategy to support and guide it.

A Focus on Products, Not Customers. Institutionstend to focus too much on products and not enough


on customers. They often compound the problem bytrying to impose a customer perspective on a tradi-tional product-focused organization.

An Insensitivity to Customer Needs. Many institutionsare unwilling to redesign their offerings to meet cus-tomers’ needs and to incorporate new insights intothose needs.

A Dependence on Technology. Institutions tend tobelieve that acquiring the right software is the solu-tion to managing customer relationships and that theoverall approach to customization should be similarto that for an IT project.

A Focus on Cost Cutting and Efficiencies. Many in-stitutions see the online channel as a way to offercheaper service rather than as a means to provide better service or to sell more products.

Many financial institutions feel challenged by themost basic elements of the online channel. Indeed, ahuge gap remains between the channel’s present real-ities and its tantalizing possibilities. A senior executiveat a U.S. mortgage company summed up the frustra-tion of many financial institutions: “No other industryhas as much information about a customer as we doand does less with it.”

The Third Level of Customization

The frustration runs deep, and with good reason: theonline channel already has the power to bring cus-tomization to a new level. The first level of managingcustomer relationships is the traditional approach,which involves simple monitoring and tabulation ofexisting customer information with little differentia-tion for various groups. The second level—what we


call the static segmentation model—involves using offlinedata-mining techniques to deliver a segmented offer-ing based on superior customer information.

The third level, made possible by the online channel,creates the opportunity to use dynamic and contex-tual segmentation techniques by updating a custom-er’s personal profile every time a financial institutioninteracts with the customer. At this level, institutionsgain the ability to harness powerful test-and-learntechniques in order to customize their products effectively to a market of one. Clients can also “self-customize” by designing their own offerings. Theycan, for example, select the risks they want covered by their insurance policies or choose the investmentinformation they want to receive—and how they wantto receive it. Financial institutions have provided thislevel of service to companies for years. Now the Inter-net allows them to offer such service to individual cus-tomers as well.

The credit card industry is currently the most sophisti-cated practitioner of the third approach. In somecountries, leading players such as Capital One andProvidian have the ability to present a unique credit-card offering to each customer based on his or hercredit risk and history. They can also alert customersto specific services and target promotions to segmentsbased on test-and-learn approaches.

Developing Customized Offerings

To reach the third level of customization, financialinstitutions must address several important issues re-garding, for example, the availability of data, the ap-propriate IT infrastructure, and organizational capa-bilities and culture. Instead of rushing in and trying to do everything at once, such institutions need to


adopt a phased approach to their customization ef-forts. They should address strategy issues first, decid-ing what their business model should be. They shouldalways ensure that significant business value drivestheir customization projects. Then they should launchpilot programs to find out what works well. Such pro-grams should be kept small and focused, with conser-vative estimates for potential returns. Finally, financialinstitutions can start acquiring the technologies theyneed and implementing their full strategies. In select-ing technologies, managers should try to choose flexi-ble tools that can be easily adapted to changing needs.

There are five aspects to this process:

Insight. Such an approach begins with a detailed segmentation of a financial institution’s customers on the basis of their needs. This kind of segmentationshows executives what drives profits and suggests howthey should customize offerings for valued custom-ers. Given high customer-acquisition costs, segment-specific offerings are critical to differentiating thebusiness and building profitability. For example, Next-Card and Capital One already make extensive use ofsegmentation, using the information they collect tolower customer acquisition costs and improve reten-tion. Developing highly customized offerings also re-quires achieving a unified view of a customer’s finan-cial holdings. An institution should use the power ofits brand and franchise to persuade customers togroup all their account information with it.

Strategy. Before pursuing a customized client ap-proach online, financial institutions should adopt astrategy appropriate to their level of development. Fora start-up, the key challenge will be how to transformvisitors into actual clients. For an established onlineoperation, the goal will be how to cross-sell to in-crease profits and retain customers. If the online


operator is the market leader and competitors arecatching up, the challenge will be to improve serviceto protect market position and pricing.

Organization. Online offerings need the support ofemployees at branch offices and call centers. Wach-ovia, for example, had difficulty attracting customersto its online offering until it gave financial incentivesto its branch staff to enlist online customers. Thebank then increased sign-up rates tenfold within amonth. Such an integrated multichannel approachcan be quite powerful but is complex and difficult todo well. One European bank learned that it had tofollow up its e-mail sales pitches with messages fromits call centers. After the bank made that discovery, itssuccess rate for bringing in new business doubled.

Capabilities. Delivering highly customized offeringswill require many organizations to acquire or developentirely new skill sets. Mastery of direct marketingapproaches and techniques is critical to creating com-pelling, high-quality customized offerings in onlineretail financial services. Credit card players have theadvantage because they are experienced practitionersof the controlled-testing and continuous-learningtechniques that are required to refine customizedofferings and create targeted approaches.

Infrastructure. Highly customized offerings also re-quire a new infrastructure. Thanks to the onlinechannel, customers can now access and review muchmore information than ever before. As a result, finan-cial institutions need to develop better editorial con-tent, as well as the operational capability to managethe content dynamically. Intuit, for example, foundthat it had to create a publishing business as it built itsonline financial-services company. Customization alsoplaces a significant new burden on an institution’s


transactional capabilities and corresponding IT infra-structure. To attract and retain the primary onlinerelationship with preferred customers, financial insti-tutions need to offer flawless and consistent executionacross all their channels. This service often requiresmore sophisticated software in the technology plat-form, as well as corresponding new skill sets withinthe IT organization.

The Experience Is Everything

Ultimately, these assets and capabilities must bedeployed and coordinated to create a better buyingexperience for the customer. Institutions should allowtheir customers to contact them online, review prod-ucts carefully, and compare them with competingofferings. There should be links to related products:higher cross-selling rates are a big benefit of onlinecustomer-relationship management. If a customer ismulling over new investment options, there should belinks to financial planning tools and to life-insuranceand disability policies. Most critically, the online offer-ing should always allow customers to complete trans-actions online. If they cannot close a transactiononline, then all the institution’s efforts are for noth-ing. Realize, too, that in the online world the exit isalways just one click away. Any flaw in an offering maydrive customers away.

Financial institutions considering a customizationapproach should also try to answer the following ques-tions: What is our current strategy and position rela-tive to our key competitors when we deal with pre-ferred customers? What are the fundamental driversof our economics and overall business strategy? Is cus-tomer acquisition the leverage point, leading to a fo-cus on targeted marketing, or are the economics of


customer retention and cross-selling more compel-ling? Finally, which of these drivers can be signifi-cantly affected through the creative use of customerinformation, and which holds the greatest revenuepotential after allowing for the costs of deliveringmore customized products and services?

* * *

The online channel is now attracting enough custom-ers that it makes economic sense to invest in the cre-ation of a suite of personalized offerings that can turncasual customers into profitable long-term relation-ships. The online newcomers that stormed into thefinancial world during the past few years have largelyfailed to develop such relationships. Established finan-cial institutions have an opportunity to leverage theirsubstantial assets and capabilities, learn from others’mistakes, and create winning customized offerings.

Eric OlsonCarlos TrascasaMartin Essayan

Eric Olson is a vice president in the San Francisco office ofThe Boston Consulting Group. Carlos Trascasa is a vicepresident in the firm’s Madrid office. Martin Essayan is avice president in BCG’s London office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2001. All rights reserved.


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Customization: Making Real Money in a Virtual WorldCustomization: Making Real Money in a Virtual World Financial institutions enthusiastically rushed to build online retail franchises